M/S MANIPAL EDUCATION AND MEDICAL GROUP INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

In all these appeals, the only grievance of the assessee is regarding disallowance made by the AO and upheld by the ld.CIT(A) u/s 14A of the IT Act of Rs.16,99,690/- in AY: 2010-11,Rs.18,03,941/- for AY: 2011-12 and Rs.28,99,172/- for AY: 2012-13. The grounds raised in all the three years are identical except the difference in amounts and hence, the grounds raised by the assessee in for AY: 2010-11 are reproduced as under;

Learned AR of the assessee reiterated the same contentions as were raised before the CIT(A).

The ld. DR of the revenue supported the orders of the authorities below. Reliance was placed on two Tribunal orders rendered in the case of ACIT Vs Goel Investment Ltd., reported in 44 CCH 0213 (Lucknow) and also in the case of ACIT Vs Transformers & Rectifiers (Ind.)Ltd., 32 CCH 0033( Ahd.Trib.). He submitted a copy of both these Tribunal orders.

We have considered the facts of the present case and gone through the orders of the authorities below. We find that the disallowance was made by the AO u/s 14A of the IT Act, read with Rule 8D of Income Tax Rules, 1962 out of administrative expenses and no disallowance was made by the AO out of interest expenditure. But there is no finding given by the AO or by the CIT(A) as to whether the assessee has incurred administrative expenses to the extent disallowed by the AO in each of these three years and without looking into this aspect as to whether the assessee has in fact incurred the administrative expenses and claimed the same as deduction, no disallowance can be made and in any case, the disallowance made by the AO u/s 14A of the Act cannot exceed the expenses claimed by the assessee under various head in the nature of administrative expenses because section 14A is a disallowing section in respect of the expenses claimed by the assessee. Hence, we feel it proper that this matter should go back to the file of the AO for fresh decision. Accordingly, we set aside the order of the ld. CIT(A) in all the three years and restore the entire matter back to the file of the AO for a fresh decision with a direction that he should pass a speaking and reasoned order after providing adequate opportunity of being heard to the assessee. He should give a clear finding as to how much expenses in the nature of administrative expenses has been incurred by the assessee in each of these years and whether the assessee is able to establish or not that any expenditure out of the said expenses is directly relatable to earning of any taxable income and to the extent, the assessee is able to establish that the expenses are directly related to earning of taxable income, such expenses cannot be considered for making disallowance u/s 14A of the IT Act, 1961 because the disallowance u/s 14A can be made only to the extent of total expenditures which are incurred by the assessee and which are directly relatable to earning of the tax free income and the expenses which are common and are not having direct nexus with earning of either the taxable income or tax free income, the disallowance has to be proportionate. Rule 8d prescribes that disallowance has to be to the extent of 0.5% of average investment. In our considered opinion, this is maximum limit of the disallowance and not minimum limit and therefore, if the actual administrative expenses incurred and claimed as deduction is less than the same, the disallowance cannot be more than such actual expenses incurred and claimed as deduction. The AO should pass necessary order, as per law and as per the above discussion after providing reasonable opportunity of being hard to the assessee.

In the result, all the three appeals of the assessee are allowed for statistical purposes.